CGT won’t deter foreign investors in London property – but this might

We have written here several times before about the tax status of foreign investors in UK property. It has long seemed odd that non-residents who hold for the long term are obliged to pay nothing but stamp duty and council tax.

They buy in the UK for the stability and security our legal system and history of maintaining property rights gives them. But we charge them almost nothing for the use of this safe-haven infrastructure. It makes no sense, and as London house prices have soared, that’s something more and more people have noticed.

No surprise then that the government has gone for a crowd pleaser by announcing that from next year, non-residents will have to pay capital gains tax (CGT) on any new gains on their UK properties (as I understand it, gains will be rebased from 2015).

This isn’t a bad idea. As the analysts at LCP say, “the exemption from CGT for foreign owners has unarguably represented an inequality with domestic buyers”. Changing it is good. But anyone who thinks that this tax shift will have any effect on house prices in London will probably be disappointed.

CGT is a tax on profit, and only profit. It isn’t going to touch any of the gains made over the last few years, so not only will the new tax not encourage any selling (as some hoped/feared), but it seems unlikely to act as much of a deterrent in itself, even on top of the recent rises in stamp duty.

Foreign investors in London tend to hold for very long periods, and are more motivated by the security of their holdings than the tax payable on them. However, there is one thing out there at the moment that could make a difference to the foreign appetite for London houses.

A few years ago, a combination of the crisis and the collapsing pound made property look ludicrously cheap to foreigners. That’s turned about: the pound is now at a five-year trade-weighed high – something that along with the nominal rise in prices makes property look not quite as cheap as it did.

A fund manager friend just back from Hong Kong tells me that two years ago, all the ads in the South Morning China Post were for smart two-bedroom flats in London of the type we are so good at exporting. Today, they are all for smart two-bedroom flats in Tokyo.

This is a crowd pleaser simply because it’s downright unfair. However, I agree it doesn’t change the appetite for foreign investors to invest in London property. This pseudo property bubble we’re hearing about is simply hot money from abroad moving into the London property market. With rates set to go up this should dampen demand – supported by your interesting fact about Tokyo.

Dawn

Now I am only wondering if emigrating to avoid CGT on second homes in the UK, for UK tax residents, will no longer be an option, too.

GFL

The tax system in general is just full of loop holes and completely unfair rules. Most loop holes can’t be closed in a globalized world and those that can take years and years.

With such a complicated tax system, the very rich can easily reduce their UK income to zero through offshore loans and what not. I’m sure they already know ways of not paying CGT either when this is introduced.

We need a much simpler system; the current system is just killing the average guy, who is subject to every tax under the sun!

Slightly off topic, instead of biased stories about BTL versus residential properties I would like to see MW do an article on why contractors, pharmacists, GPs, even a lot of journalists can take their wages through a company and hugely reduce their tax obligations (and claim expenses) for doing the exact same job as a PAYE employee. This is a like for like comparison!

The whole tax system is a mess!

4caster

I wonder whether MoneyWeek journalists have their own reasons not to draw attention to the tax avoidance loophole, mentioned by GFL in the last paragraph.

cmac

Well GFL,
It’s not quite as simple as you make it sound.
I myself am a self employed contractor and have been for many years.
First, I don’t work for only one company and also work for my own individual clients directly.
Secondly, I am not and have never been entitled to sick pay, holiday pay, pension contributions or any other benefits that are available to many employees.
Third, I have absolutely no security as if the work dries up, as it has done in the past few years of recession, I see my earnings plummet. No work, no income. That also applies to taking days of through illness. Not so funnily enough, even though I had a period where I was told by a medical specialist that I should be resting and not working I have had no choice but to keep on working.
Granted, if an individual is working for only one company then they should not be working as self employed or a limited company. Having said that the I am sure the rules set out by HMRC already state this.
All I can suggest is that if there is such a great benefit to being self employed or running your own company then why not take the plunge?
Just remember that the grass may always be greener on the other side, but it still needs cutting.

GFL

Cmac,

I’m talking purely from a tax perspective. Of course there is risk/reward associated with contracting. The wages tend to be a lot higher (which I’m fine with) to compensate for all the stuff you have highlighted (lack of job security, no health care, etc). But what I’m not fine with is 2 people doing the exact same job, literally sitting next to each other paying different rates of tax.

Don’t get me wrong, I’m very pro lower taxes for everyone – I think the middle class is getting killed, which hurts us as a country. But it’s insane having a system that allows certain people to shuffle money through an alternative vehicle and pay considerably less tax for the doing so.

Even the contractors I know laugh at how silly the situation is. It is rarely reported in the news, I wonder why

GFL

Not to mention a lot of contracts are offered instead of PAYE, so there is not even additional risk. When newspapers get people like Ken Livingstone to write an article, are they taking additional risk by getting their salary via a company? Of course not!

I bet some of the MW writters, for example Bengt, get paid via a company.

Tax slave

Yes, an overdue levelling of the playing field for Brits and foreigners. However, CGT is a tax is on inflation. If there would be no inflation then there would be no CGT receipts for HMRC. If the Government is truly committed to long term investments, then CGT would be inflation adjusted or time attenuated (as it used to be in the UK, and as our socialist French friends do – no CGT after 22 years). Under the current rules, CGT is merely confiscatory, and investors will certainly feel the ‘bite’ when inflation takes off again, as it surely will. Canny investors will watch the detail develop on this legislation and decide whether to invest – the text in the Autumn statement is (intentionally?) vague.

Highgate

Quite why this welcome change to CGT cannot be implemented before April 2015 is a mystery. Foreign investors have received preferential tax treatment at a huge cost to the British public for far too long.

Greg

Quite simply George was worried that implementing CGT before April 2015 might weaken the London housing market and ‘feel good factor’ before the general election – we’re not stupid! What is needed urgently is a Land Value Tax to replace all property related taxes – as soon as possible!

Capitalistic Chris

All capital taxation is an enterprise crushing device. 1930’s socialism is not appropriate these days. CGT and IHT should be abolished. If not that at least roll over relief for business investment should be put in place asap. Unleash the power of private capital and see what good will happen. Everyone accepts that lack of investment is the problem. Banks are not lending, Government has run out of real money to fund investment and personal capital is being taxed. What is it that the idiots who run this country not understand about the law of diminishing returns!
Political taxes equal financial disaster.

Aged Tax Slave

The Article mentions foreign investors not paying Income Tax but ‘paying’ Council Tax. Please can we remember that the rest of us contribute to the massive (varies between Councils) supplement handed to Councils by the Govt. (us Taxpayers), to top up the Council Tax.
Foreign freeloaders are on a fantastic deal, it should be stopped!!!

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